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Art. 1.15A. INDEPENDENT AUDIT OF FINANCIAL STATEMENT. Article repealed effective April 1, 2007 Purpose Sec. 1. The purpose of this article is to require an annual examination by an independent certified public accountant of the financial statements reporting the financial condition and the results of operations of each insurer. Application Sec. 2. This article applies to each insurer except an insurer exempt under Section 4, 6, or 7 of this article. Definitions Sec. 3. In this article: (1) "Accountant" means an independent certified public accountant or accounting firm that meets the requirements of Section 12 of this article. (2) "Affiliate" has the meaning assigned by Subsection (a) of Section 2 of Article 21.49-1 of this code. (3) "Board" means the State Board of Insurance. (4) "Commissioner" means the commissioner of insurance. (5) "Insurer" means an insurer authorized to do business under the law of this state and includes life, health, and accident insurance companies, fire and marine companies, general casualty companies, title insurance companies, fraternal benefit societies, mutual life insurance companies, local mutual aid associations, statewide mutual assessment companies, mutual insurance companies other than life, farm mutual insurance companies, county mutual insurance companies, Lloyd's plans, reciprocal and interinsurance exchanges, group hospital service corporations, health maintenance organizations, stipulated premium insurance companies, and nonprofit legal services corporations. (6) "Subsidiary" has the meaning assigned by Section 2 of Article 21.49-1 of this code. Exemption Sec. 4. (a) Except as provided by Subsections (b) and (c) of this section, an insurer otherwise subject to this article that has less than $1 million in direct premiums written in this state during a calendar year, in lieu of the annual examination required by this article for that calendar year, may submit an affidavit under oath of an officer of the insurer that specifies the amount of direct premiums written in this state, and such insurer shall be exempt from the audit required by this article. (b) The commissioner may require an insurer that is exempt under Subsection (a) of this section to comply with this article if the commissioner finds that the insurer's compliance is necessary for the commissioner to fulfill the commissioner's statutory responsibilities; provided that this subsection shall not apply to any fraternal benefit society qualifying for exemption under Subsection (a) of this section which has no direct premiums written in this state for accident and health insurance during a calendar year. (c) An insurer that has assumed premiums of $1 million or more under reinsurance agreements is not exempt under Subsection (a) of this section. Sec. 5. Deleted by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02, eff. Sept. 1, 1991. Exemption for Insurers Filing Audits in Another State Sec. 6. (a) A foreign or alien insurer that files an audited financial report in another state, pursuant to that state's requirement for audited financial reports, may be exempt from filing a report under this article if the commissioner finds that the other state's requirements are substantially similar to the requirements in this article. (b) A copy of the audited financial report, the report on significant deficiencies in internal controls, and the accountant's letter of qualifications filed with the other state must be filed with the commissioner in accordance with the filing dates provided by Sections 9 and 16 of this article. (c) A copy of a notification of adverse financial conditions report filed with the other state by a person exempt under this section must be filed with the commissioner within the time provided by Section 15 of this article. Financial Hardship Exemption Sec. 7. (a) An insurer otherwise subject to this article and not eligible for an exemption under Section 4 or 6 of this article may apply to the commissioner for a financial hardship exemption. (b) Except as provided by Subsection (c) of this section, the commissioner may grant an exemption under this section if the commissioner finds, after review of the application, that compliance with this rule would constitute a severe financial or organizational hardship on the insurer. An exemption may be granted at any time and from time to time for a specified period or periods. (c) The commissioner may not grant an exemption under this section if the exemption diminishes the department's ability to monitor the financial condition of the insurer and may not grant an exemption to an insurer that: (1) has been placed under supervision, conservatorship, or receivership during the five-year period immediately preceding the date on which application for the exemption is made; (2) has undergone a change in control, as defined by Section 2, Article 21.49-1 of this code during the five-year period immediately preceding the date on which application for the exemption is made; (3) has been identified by the department as a troubled insurer; (4) has been subject to a significant number of complaints, as determined by the commissioner, during the five-year period immediately preceding the date on which application for the exemption is made; (5) has been or is the subject of a disciplinary action by the board; or (6) is not in compliance with any law or any rule adopted by the board or commissioner. (d) An insurer that is aggrieved by a determination of the commissioner under this section may appeal that determination under Article 1.04 of this code. Board's Authority Sec. 8. This article does not prohibit, preclude, or limit the board from ordering, conducting, or performing an examination of any insurer under this code or the board's rules. Filing and Extensions for Filing of Annual Audited Financial Reports Sec. 9. (a) Each insurer shall have an annual audit by an accountant and shall file an audited financial report for the preceding calendar year with the commissioner on or before June 30 of each year. (b) Extension of the filing date for the audited financial report may be granted by the commissioner for 30-day periods on a showing by the insurer and its accountant of reasons for requesting the extension and determination by the commissioner of good cause for an extension. The request for extension must be submitted in writing before the 10th day preceding the date the report is due to be filed and must include sufficient detail to permit the commissioner to make an informed decision with respect to the requested extension. (c) The commissioner may require an insurer to file the audited financial report on a date before June 30 of a particular year if the commissioner notifies the insurer of the date not later than the 90th day before the date on which the report is to be filed. (d) If the insurer fails to comply with this article, the commissioner shall order the audit performed by an independent qualified certified public accountant and assess against the insurer the cost of auditing the insurer's financial statement under this article, and the insurer shall pay the amount of the assessment to the commissioner not later than the 30th day after the date the commissioner issues the notice of assessment to the insurer. Money collected under this section shall be deposited in the state treasury to the credit of the State Board of Insurance operating fund for the use of the board and the department for the purpose of paying the expenses incurred under the article. Contents of Audited Financial Report Sec. 10. (a) The audited financial report shall report the financial condition of the insurer as of the end of the most recent calendar year and the results of the insurer's operations, changes in financial position, and changes in capital and surplus for that year in conformity with statutory accounting practices prescribed or otherwise permitted by the insurance regulator in the state of domicile. (b) The audited financial report must include the following: (1) the report of an accountant; (2) a balance sheet that reports admitted assets, liabilities, capital, and surplus; (3) a statement of gain or loss from operations; (4) a statement of cash flows; (5) a statement of changes in capital and surplus; (6) any notes to financial statements; and (7) supplementary data and information including any additional data or information required by the commissioner. (c) The notes to the financial statements required by Subdivision (6) of Subsection (b) of this section must include: (1) a reconciliation of differences, if any, between the audited statutory financial statements and the annual statements filed pursuant to this code with a written description of the nature of these differences; (2) any notes required by the appropriate National Association of Insurance Commissioners annual statement instructions or by generally accepted accounting principles; and (3) a summary of the ownership of the insurer and the relationship of the insurer to any affiliated company. (d) The financial statements included in the audited financial report must be prepared in a form and using language and groupings substantially the same as the relevant sections of the insurer's annual statement filed with the commissioner. Except in the first year in which an insurer is required to file an audited financial report, the financial statements also must be comparative, presenting the amounts as of December 31 of the reported year and the amounts as of December 31 of the preceding year. (e) Insurers required to be examined under Section 2 of this article who did not retain an independent certified public accountant to perform an annual examination for the previous year shall not be required to include the following reports covered by the accountant's opinion for the first year, although such statements shall be presented and labeled unaudited: (1) Statement of operations. (2) Statement of cash flows. (3) Statements of changes in capital and surplus. All other reports described in Section 9 must be included. For the succeeding year and each year thereafter, such insurers shall file with the commissioner all reports required by this article. (f) The audited financial report must also include information required by the department to conduct the examination of the insurer under Article 1.15 of this code. The commissioner shall adopt rules governing the information to be included in the report under this subsection. Canadian or British Insurers Sec. 10A. (a) In lieu of the audited financial report required under Section 9 of this article, an insurer domiciled in Canada or the United Kingdom may file its annual statement of total business on the form filed by the company with the appropriate regulatory authority in the country of domicile. The statement must be audited by an independent accountant chartered in the country of domicile. (b) The chartered accountant shall register with the commissioner under Section 11(a) of this article, and the registration must be accompanied by a statement, signed by the accountant, indicating that the accountant is aware of the requirements of this article and affirming that the accountant will express the accountant's opinion in conformity with those requirements. Designation of Accountant Sec. 11. (a) Each insurer must register with the commissioner the name and address of the accountant retained to prepare an audited financial report required by this article. The registration must be made in writing not later than December 31 of the calendar year to be covered by the audited financial report. (b) The registration must be accompanied by a statement signed by the accountant indicating that the accountant is aware of the requirements of this article, and of the rules and regulations of the insurance department of the insurer's state of domicile that relate to accounting and financial matters and affirming that the accountant will express the accountant's opinion on the financial statements in terms of their conformity to the statutory accounting practices prescribed or otherwise permitted by that department, specifying any exceptions the accountant believes are appropriate. (c) The commissioner may not accept an audited financial report from an insurer that is prepared by an accountant that is not registered under this section. (d) The commissioner may not accept registration under this section for a person who does not comply with Section 12 of this article and with the other requirements of this article. Qualifications of Accountant Sec. 12. (a) Except as provided by Subsections (b) and (c) of this section, the commissioner shall accept an audited financial report from an accountant who is an independent certified public accountant in good standing with the American Institute of Certified Public Accountants and in all states in which the accountant or firm is licensed to practice and who conforms to the Code of Professional Ethics of the American Institute of Certified Public Accountants and to the rules and regulations and Code of Ethics and Rules of Professional Conduct of the Texas State Board of Public Accountancy or a similar code. In the case of an insurer domiciled in Canada, the commissioner shall accept an audited financial report from an accountant chartered in Canada, and, in the case of an insurer domiciled in Great Britain, the commissioner shall accept an audited financial report from an accountant chartered in Great Britain. (b) A partner or other person responsible for rendering a report for an insurer for seven consecutive years may not render a report for that insurer, or any of the subsidiaries or affiliates of the insurer that are engaged in the business of insurance, during the two years following the seventh year. The commissioner may determine that the limitation in this subsection does not apply to the accountant for a particular insurer if the insurer demonstrates, to the satisfaction of the commissioner, that its application to the insurer would be unfair because of unusual circumstances. In making the determination, the commissioner may consider: (1) the number of partners or individuals employed by the accountant, the expertise of the partners or individuals employed by the accountant, or the number of insurance clients of the accountant; (2) the premium volume of the insurer; and (3) the number of jurisdictions in which the insurer transacts business. (c) The commissioner may not accept an audited financial report prepared in whole or in part by an individual or firm who the commissioner finds: (1) has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. Sections 1961 through 1968), or any state or federal criminal offense involving dishonest conduct; (2) has violated the insurance laws of this state with respect to any report filed under this article; (3) has demonstrated a pattern or practice of failing to detect or disclose material information in reports filed under this article; or (4) has directly or indirectly entered into an agreement of indemnity or release of liability regarding an audit of an insurer. (d) The commissioner may hold a hearing to determine if an accountant is qualified and independent and, considering the evidence presented, may rule that the accountant is not qualified and independent for purposes of expressing an opinion on the financial statements in the audited financial report filed under this article. (e) If the commissioner rules that an accountant is not qualified and independent, the commissioner shall issue an order directing the insurer to replace the accountant with a qualified and independent accountant. Resignation or Dismissal of Accountant Sec. 12A. (a) If the accountant who signed an audited financial report resigns as accountant for the insurer or is dismissed by the insurer after the report is filed, the insurer shall notify the department not later than the fifth business day after the date of resignation or dismissal. (b) Not later than the 10th business day after the insurer gives the notification required by Subsection (a) of this section, the insurer shall file a written statement with the commissioner advising the commissioner of any disagreements between the accountant and personnel of the insurer responsible for presentation of its financial statements relating to accounting principles or practices, financial statement disclosure, or auditing scope or procedures that occurred during the 24-month period immediately preceding the date of resignation or dismissal and that, if not resolved to the satisfaction of the accountant, would have caused the accountant to note the disagreement in connection with the audited financial report. The statement must include both disagreements that were resolved to the accountant's satisfaction and those that were not resolved to the accountant's satisfaction. (c) The insurer shall file with the statement required under Subsection (b) of this section a letter signed by the accountant stating whether the accountant agrees with the insurer's statement and, if not, stating the reasons why the accountant does not agree. If the accountant is unwilling or unable to provide the letter, the insurer shall file with the commissioner a copy of a written request to the accountant for the letter. Consolidated or Combined Audits Sec. 13. (a) An insurer may make written application to the commissioner for approval to file audited combined or consolidated financial statements instead of separate annual audited financial reports if the insurer is part of a group of insurance companies that uses a pooling or 100 percent reinsurance agreement that affects the solvency and integrity of the insurer's reserves and the insurer cedes all of its direct and assumed business to the pool. The application for approval must be filed on or before December 31 of the calendar year for which the combined or consolidated audited financial statements are to be filed. (b) An insurer that receives approval from the commissioner under Subsection (a) of this section shall file a columnar consolidating or combining worksheet for consolidated or combined financial statements that must include the following: (1) amounts shown on the consolidated or combined audited financial statements; (2) amounts for each insurer stated separately; (3) noninsurance operations shown on a combined or individual basis; (4) explanations of consolidating and eliminating entries; and (5) reconciliation of any differences between the amounts shown in the individual insurer columns of the worksheet and comparable amounts shown on the insurers' annual statements. (c) An insurer who does not receive approval from the commissioner to file an audited combined or consolidated financial statements for the insurer and any of its subsidiaries or affiliates shall file a separate audited financial report. Scope of Accountant's Examination and Report Sec. 14. (a) The financial reports furnished under Section 8 of this article must be examined by an accountant. (b) The examination of an insurer's financial reports shall be conducted in accordance with generally accepted auditing standards or with standards adopted by the Public Company Accounting Oversight Board, as applicable. The accountant conducting the audit shall consider: (1) the standards specified in the Examiner's Handbook promulgated by the National Association of Insurance Commissioners; or (2) other analogous nationally recognized standards adopted by commissioner rule. Notification of Adverse Financial Condition Sec. 15. (a) An insurer required to furnish an audited financial report shall require the accountant to immediately notify in writing the board of directors of the insurer or its audit committee of a determination by that accountant that: (1) the insurer has materially misstated its financial condition as reported to the commissioner as of the balance sheet date currently under examination; or (2) the insurer does not meet the minimum capital and surplus requirements provided by this code for that insurer as of that date. (b) The insurer shall furnish to the commissioner a copy of the accountant's written notice not later than the fifth business day after the date on which the insurer receives the notice from the accountant and shall provide the accountant with evidence that the notice has been furnished to the commissioner. If the accountant does not receive the evidence on or before the fifth business day after the date on which the accountant notified the insurer, the accountant shall, not later than the 10th business day after the date on which the accountant notified the insurer, file a copy of the written notice with the commissioner. (c) If the accountant, subsequent to the date of the audited financial report filed under this article, becomes aware of facts that might have affected the report, the accountant must take action as prescribed in Volume 1, Section AU 561, Professional Standards of the American Institute of Certified Public Accountants. (d) An accountant is not liable to the insurer, its policyholders, shareholders, officers, employees or directors, creditors or affiliates, for any statement made under Subsections (a) and (b) of this section if the statement was made in good faith to comply with those subsections. Report on Significant Deficiencies in Internal Control Sec. 16. (a) In addition to the audited financial report, each insurer shall furnish to the commissioner the written report of significant deficiencies required and prepared in accordance with the Professional Standards of the American Institute of Certified Public Accountants. (b) The report required by this section must be filed annually by the insurer with the commissioner not later than the 60th day after the date the audited financial report is filed. The insurer is also required to provide a description of remedial actions taken or proposed to correct significant deficiencies, if the actions are not described in the accountant's report. (c) The report must follow generally the form for communication of internal control structure matters noted in an audit described in SAS No. 60, Section AU 325, Professional Standards of the American Institute of Certified Public Accountants. Accountant's Letter of Qualifications Sec. 16A. (a) The audited financial report must be accompanied by a letter furnished by the accountant stating: (1) that the accountant is independent with respect to the insurer and conforms to the standards of the profession contained in the Code of Professional Ethics, the statements of the American Institute of Certified Public Accountants, and the Rules of Professional Conduct of the Texas Board of Public Accountancy, or a similar code; (2) the background and experience of the accountant in general, the experience in audits of insurers of each individual assigned to prepare the audit, and whether the individual is an independent certified public accountant; (3) that the accountant understands that the annual audited financial report and the accountant's opinion on the report will be filed in compliance with this article and that the commissioner will rely on the report and opinion in the monitoring and regulation of the financial position of insurers; (4) that the accountant consents to the requirements of Section 17 of this article and that the accountant agrees to make the accountant's work papers available for review by the commissioner or the commissioner's designee; (5) that the accountant is properly licensed by an appropriate state licensing authority and is a member in good standing in the American Institute of Certified Public Accountants; and (6) that the accountant is in compliance with the requirements of Section 12 of this article. (b) Subsection (a)(2) of this section does not prohibit an accountant from using any staff the accountant considers appropriate if use of that staff is consistent with the generally accepted auditing standards. Definition, Availability, and Maintenance of Accountant Work Papers Sec. 17. (a) Work papers are the records kept by the accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to the accountant's examination of the financial statements of an insurer and may include work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules, or commentaries prepared or obtained by the accountant in the course of the accountant's examination of the financial statements of an insurer that support the accountant's opinion. (b) Each insurer required to file an audited financial report shall require the accountant to make available for review by the department's examiners the work papers and any record of communications related to the audit between the accountant and the insurer prepared in the conduct of the examination. The insurer shall require that the accountant retain the audit work papers and records of communications until the department has filed a report on examination covering the period of the audit, but not longer than seven years after the period reported. (c) In the conduct of the periodic review by the department's examiners, photocopies of pertinent audit work papers may be made and retained by the board. Reviews by the department's examiners are considered investigations, and all work papers obtained during the course of those investigations may be made confidential by the commissioner, unless admitted as evidence in a hearing before a governmental agency or in a court of competent jurisdiction. Sec. 18. Deleted by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02, eff. Sept. 1, 1991. Added by Acts 1989, 71st Leg., ch. 1082, Sec. 2.01, eff. Sept. 1, 1989. Amended by Acts 1991, 72nd Leg., ch. 242, Sec. 11.02, eff. Sept. 1, 1991; Sec. 10(f) amended by Acts 1993, 73rd Leg., ch. 685, Sec. 7.06, eff. Sept. 1, 1993; Sec. 12(c) amended by Acts 2005, 79th Leg., ch. 408, Sec. 1, eff. Sept. 1, 2005; Sec. 14(b) amended by Acts 2005, 79th Leg., ch. 408, Sec. 2, eff. Sept. 1, 2005.

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Last modified: August 10, 2007